Premium Brands Holdings Corporation

 

Premium Brands has a number of specialty food manufacturing and distribution businesses across Canada and the U.S.  The foods they produce include things like deli meats, sandwiches, snacks, pasta, and seafood.  They sell their products to grocery stores, food service operators or distributors, and specialty retailers (such as Starbucks) or convenience stores.  The company has grown by acquisition and organic growth.  Its acquisition strategy is to target high-quality specialty food producers and to provide their current operators capital and a platform to grow and continue their innovation. Acquisitions are funded with convertible debentures which the company expects to eventually be converted to equity. My assessment of adjusted earnings differs from management’s presentation as I further exclude intangible amortization and changes in value of puttable interest in subsidiaries as those are more reflective on the balance sheet rather than near-term earnings.

 

Ests:     3Q18   4Q18   FY18    FY19

Revs    828.5   840.5   3.0b     3.6

EPS      1.20     1.20     4.06     5.32 +31%

 

P=86.84, Div=1.90, yield=2.2%, D/C=59% (41% ex converts, WC surplus ~30% of debt), debt/EBITDA=4.95X, TTM adj EPS=3.60, P/E=24X, FY19 P/E=16X

 

Nov 13, 2018 Exited position, execution issues again at play, I must consider that these are not temporary and could be due to structural issues, debt levels and leverage ratios continue to increase and expected profitability is not materializing, company might be in the territory of destroying value and covering it up with serial acquisitions.  Hopefully that’s not the case but I will watch from the sidelines for more evidence.

 

3Q18   1.02 vs .91 +12%, est 1.20 down from 1.27

  • Nov 13, 2018, P=86.84, TTM EPS 3.60, P/E=24X, FY19 P/E=16X

  • Reported adj EPS .95 vs .78 but does not factor intangibles

  • Revs +50% to 835.5 (+5.4% organic), GM 19.9% vs 18.4%, EBITDA +44% to 71.3m (8.5% vs 8.9%), adj EBT +26%

  • Specialty Foods +69% to 579.7m (+6.7% organic), GM 22% vs 20%, EBITDA 10.3% vs 11%

  • Premium Food Distribution +30.6% to 255.8m (+3.6% organic), GM 15.3% vs 15.9%, EBITDA 6% vs 6.9% 

  • U.S. revs almost doubled with organic growth almost 20%

  • SF disappointed wrt organic growth due to launch delays 

  • FY18 Outlook: Lowered Revs to 3-3.06bn, EBITDA to 255-265m (margin 8.3%-8.7%)

  • FY19 Outlook: Revs 3.66-3.72bn, EBITDA 320-340m (8.7%-9.1%)

  • Execution again an issue, leverage ratios continue to increase as profitability doesn’t keep pace with growth, difficult to determine if existing operations are having efficiency issues or if acquisitions are very dilutive, company is experiencing de-leverage of operating expenses which could be due ot short-term issues or could be more structural in nature.  

 

2Q18   1.21 vs 1.06, est .90

  • August 13, 2018 P=98.90, TTM adj EPS=3.49, P/E=28X, FY19 P/E=25X

  • Reported adj EPS 1.10 vs .94

  • Revs +31.9% to 761.5m (+6.6% organic), GM 20.9% vs 20%, EBITDA +34.9% to 19.2m, EBT +21.5%, EPS +14% due to new shares issued for acquisitions and from converts

  • Specialty Foods +50% to 522m, +10.9% organic, GM 23.3% vs 22.5%

  • Premium Food Distribution +4.3% to 239.5m, slight organic decline, GM 15.9% vs 16.2%

  • PFD saw supply disruptions in various fish from U.S. south coast due to poor weather, weaker sockeye and tuna fisheries on west coast of Canada (shouldn’t carry into 3Q), slowdown in restaurant foodservice in western Canada, partly offset by PFD’s retail initiatives in western Canada and Quebec

  • 2018 Outlook: Revs 3.01-3.07bn (previously 2.98-3.06bn), adj EBITDA 278-287m (previously 274-286) raised due to acquisitions also reflecting challenges in seafood and foodservice in western Canada while expected to be temporary, mgmt. is not sure how long they will continue

1Q18   .60 vs .65, est .68

  • Reported adj EPS .50 vs .53 incl intangible amort, change in value of puttable interest in subs

  • Revs +22.3% to 584.9m (+9.4% organic), GM 18.8% vs 19.4%, EBITDA +12.2% to 43.1m

  • Specialty Foods +32.8% to 377.9m, +13% organic, GM 20.3% vs 21.7%

  • Premium Food Distribution +6.9% to 207m. +5.6% organic, GM 16.2% vs 16%,

  • 2018 Outlook: Affirmed guidance for core business, raised revs by 330m and EBITDA by 30m due to acquisitions

  • Revs solid but EPS not only missed but was also down y/y again compounded by impacts from acquisitions in seasonally weak quarter, some weather impacts, product mix, increased overhead, higher interest exp.

Mid Quarter Update

Announced acquisition of Oberto and increased ownership of McLean from 36.2% to 66.2%, both investments combined investment $237m, combined revs ~246m. Issuing 1.28m shares @ $117.35 for gross proceeds of $150m to partly pay for the acquisitions.

 

4Q17   .78 vs .84, est .91 down from 1.01, FY17 EPS 3.40 vs 2.85

  • Raised dividend 13%, signed 4 purchase agreements for $227m, annual revs ~277m

  • Revs +9.9% to 585.4m (+16.3% ex extra week last year), GM 18.5% vs 19.6%, EBITDA +3.7% to 47.3m but +12.1% ex extra week, FY EBITDA +22.9% to 190.2m

  • Specialty Foods +13.9% to 372.6m, +12.3% organic, GM 19.8% vs 21.9% due to tight labour market, higher employee turnover particularly in U.S. (impacting them and their suppliers/customers)

  • Premium Food Distribution +3.7% to 212.8m (+10% ex extra week), +1.8% organic, capacity restraints in Ontario distribution facility

  • Experiencing tight labour markets

  • 2018 Outlook: Revs 2.65-2.73bn (est 2.65), EBITDA 244-256m vs 190.2m, expects organic growth ~13%, does NOT include recently announced acquisitions, sandwich plant that came online in June and portioning and distribution centre in Toronto that will be completed in 2Q18 will contribute to improve results, also expect growth in legacy business due to “robust innovation pipeline”

  • Pretty big miss on earnings due to some short-term issues, tight labour market might have more impact but mgmt. is addressing issues (higher cost?) and organic growth and new facilities coupled with acquisitions appear to keep things on track, Trailing P/E of 37X looks high compared to what they delivered in FY17 but mgmt outlook supports FY18 EPS estimates which at $4.29 is 50% higher than FY17

3Q17   .91 vs .81, est .93

  • Revs +15.9% to 557.6m (short of 586.3m estimated), GM 18.4% vs 19%, EBITDA +12.5% 49.5m, 8.9% vs 9.1%

  • Results below expectations due to delays of several initiatives including prodn from new Phoenix facility that started shipping at the end of the quarter. Also poor weather in Quebec and Ontario resulted in significant declines in outdoor summer food.

  • Specialty Foods +20% to 329.7m, +8.5% organic

  • Premium Food Distribution +10.4% to 228.9m, +3.5% organic

  • Entered into LOIs for several significant acquisitions targeted for completion before year end, completed 3 in 3Q.

2Q17   1.06 vs .76, est .88

  • Revs +24.7% to 577.4m, GM 20% vs 19.1%, EBITDA +37.2% to 55m, margin 9.5% vs 8.7%

  • Specialty Foods +27.4%, +9.5% organic

  • Premium Food Distribution +21%, +5.6% organic

  • Completed sandwich facility in Phoenix, operating 5 prodn lines, expect 10 by year end, expect to incur start-up costs until 4Q ($5m total in FY17)

1Q17   .65 vs .42

  • Revs +25.5% to 478.2m, GM 19.4% vs 17.5%, EBITDA +53% to 38.4m

  • Specialty Foods +8.5% to 284.5m (+11% from acquisition, +3.9% organic volume, offset by lower ASPs and fx headwinds).

  • Premium Food Distribution +63% to 193.7m (+56% from acquisition, +6.1% organic volume, and slightly higher ASPs).

  • 2 projects to be done by year end, building a 212k sq foot sandwich plant in Phoenix, will increase capacity to 610k sq feet (53% expansion), expanding Centennial Foodservice protein distribution into Ontario (from western Canada) with 105k sq foot facility in GTA to distribute live, fresh, and frozen seafood as well as a “full selection of top grade traditional proteins” from local and global suppliers.